Economic Logic, Too

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I discuss recent research in Economics and various events from an economic perspective, as the name of the blog indicates. I plan on adding posts approximately every workday, with some exceptions, for example when I travel.

Monday, March 4, 2013

Workers in some occupations get to retire with full benefits much earlier than others, for example firemen, police officers and jail guards. The justification is that they have dangerous or even life threatening occupations, and thus should be able to enjoy as much retirement as others. Does this argument really hold water?

Pierre Pestieau and Maria Racionero look at this question from the angle of optimal taxation and social security. Those with harsh occupations have shorter expected lifetimes (on average) and should be given early retirement by a utilitarian social planner so that they can consume more in early years. But the social planner needs to prevent the others from doing the same, and thus taxes heavily the savings of those in harsh occupations. Why would the social planner need to do this? It observes only the occupation, and thus has imperfect knowledge about expected lifetime. The worker knows better and can choose when to retire. Thus the issue the social planner faces is not that workers would choose the wrong occupation, it is rather that the workers who expect a longer lifetime would fake having a short one when they are in the harsh occupation.

Thus the paper is not at all about giving earlier retirement to people in harsh occupations. It is about giving that to people who expect to live a shorter life, using a signal from the occupation they are in, because it so happens that their is some correlation. It would be more interesting to see people sorting into those occupations once they learn what their expected lifetime is. To me this opens another question: if someone works in a dangerous occupation that has no long-lasting health effects expect sudden death (examples: police officer), conditional on having survived, should one still get early retirement? Probably not. But it matters when people decide what occupation to take.